VENEZUELA
POLITICAL AND ECONOMIC OUTLOOK
EUGENIO MARTINEZ
+58 412 3338207
The last round of
negotiations ended up
distancing Henry Ramos
Allup from the Primero
Justicia and Voluntad Popular the scenario of an election without international recognition that
parties.
The promise of the
government to allow
international election
YEAR 2018 | NUMBER 3
THE OPPOSITION IS FRAGMENTED IN THE
DOMINICAN REPUBLIC
POLITICAL SCENARIO
The last round of negotiations in the Dominican Republic increased the
fragmentation of the Venezuelan opposition. Although the pressure of
presidential candidate of the political party Acción Democrática (AD)
Henry Ramos Allup to reach an agreement before January 31 was not
successful, his actions increased the distancing with the representatives
of the Primero Justicia (PJ) and Voluntad Popular ( VP) parties. At the
time the negotiation increased the tension in the government before
increases sanctions against the officials of Nicolás Maduro.
Although there are agreements on non-essential points between the
negotiators of President Nicolás Maduro and the members of the
Venezuelan opposition, the date imposed by the National Constituent
Assembly (ANC) to hold an upcoming presidential election makes any
agreement unviable, despite the fact that Venezuelan government
delegate Jorge Rodríguez promised to allow international observation
for the presidential elections and to guarantee the return to the
technical conditions that existed for the parliamentary elections of
2015. However, the execution of these promises before the end of April
is unfeasible for most members of the opposition.
During the meetings held between January 28 and 31, it was ensured
that the presidential election could be held on a date close to April 28,
which would cause the National Electoral Council (CNE) to order
presidential pre-candidates to register during the week of February 5,
allowing a 30-day campaign. This pre-registration order would help
Maduro’s government to force businessman Lorenzo Mendoza to
definitely pronounce on his participation as a presidential candidate.
However, April 28 would not allow a broad international observation
mission to be deployed, would jeopardize the execution of most of the
19 necessary audits of the automated voting system, and would make it
FEBRUARY 2018
observation and 19 audits to impossible to update the Voter Register, especially abroad, where
the system is not credible due 700,000 are estimated to be potential voters, although only 110,000
to the date imposed to hold
are eligible to vote. The minimum proposal that the Head of the
presidential elections.
Maduro would allow the
opposition to have an
additional main rector in the
CNE, but he is unwilling to
manage without Tibisay
Lucena.
Delegation of the opposition Julio Borges presented to the Venezuelan
government consists of a 115-day period to organize the presidential
election.
The date suggested by the delegates of the Venezuelan government is
endorsed by Ramos Allup and the Un Nuevo Tiempo party, but is
rejected by the representatives of PJ and VP. The latter included in the
negotiation round the requirement of a presidential pardon for
Leopoldo López, while placing international observation as one of their
points of honor in the negotiation.
The composition of the CNE is another point where there is no
possibility of agreement. Although Maduro's government would be
willing to allow the opposition to have an additional main rector, it is a
point of honor for Chavismo that Tibisay Lucena remains in the
electoral branch. Lucena's intervention was the one that ultimately
allowed the CNE not to prevent PJ participation in the renewal process.
From Lucena's point of view, an action by the electoral branch against
PJ would raise suspicions about the government's strategy of defining
the opposition candidate it wishes to face. For Lucena it is essential
Ramos Allup’s participation in the presidential election as a
mechanism to legitimize the process that she will have to lead.
The waiting period until February 5 for a new meeting between
opposition and government will increase the tension between
presidential candidates Ramos Allup and Henri Falcón. While the
former president of the National Assembly insists on the holding of
primaries, the former governor of the state of Lara maintains his
rejection of the possibility of participating in base elections and
demands that the selection of the opposition unitary candidate be
carried out by consensus or through of a formula that (without being
primary) allows the consultation with the professional associations of
the country. At this moment it is uncertain if Ramos Allup and Falcón
will abandon the presidential race if the opposition grouped around
the Mesa de la Unidad Democrática party decides not to participate.
2
LEONARDO VERA
+58 416 4028406
Several significant changes
are involved in the new
exchange agreement No. 39
The unification of the
exchange rate for commercial
operations of the public and
private sectors, the reopening
of an auction market for the
private sector, the use of an
exchange rate announced as
a reference for financial and
accounting operations of the
public and private sector and
the return of security
transactions issued in foreign
currency, are highlighted as
the main innovations.
The use of two exchange rates
for the public sector: one for
income in foreign currency,
and another much lower for
financial expenditures in
dollars will have a significant
positive impact on the flow of
external revenues and
expenditures of the public
sector measured in bolivars.
THE EXCHANGE REGIME "RESETS" AND AN
IMPORTANT TRANSITION RESTARTS
ECONOMIC SCENARIO
Five months after the suspension of the mechanism of currency
allocation by DICOM auction, the government of Nicolás Maduro, with
no announcement, published in Official Gazette number 41,329 the
Foreign Exchange Agreement No. 39, which makes official the new
Complementary Floating Foreign Exchange Market Rate. Several very
significant changes in the exchange regime are contained in the new
exchange agreement.
First, the regime moves towards a unification of the official exchange
rate applicable to the vast majority of foreign-currency operations in
the public and private sectors, which at first, and with only a few
exceptions, ends the dual rate that had been operating since 2010.
Secondly, it is reopened a mechanism for allocating foreign currency
for the private sector through an auction market whose exchange rate
would obey, at least on paper, much more to the laws of market. Third,
the exchange agreement establishes that the exchange rate
corresponding to the last auction carried out will govern the basis for
calculating a large number of financial and accounting operations of
the public and private sectors. Finally, the exchange agreement
empowers brokerage firms, and the Bicentennial Public Stock
Exchange to conduct negotiations in national currency of securities
issued (or to be issued) in foreign currency of the private, national or
foreign sector.
The unification of the official exchange rate and the almost total
elimination of the DIPRO rate is a very important step whose benefits
have not been fully perceived by the analysts. On the side of the public
sector, the unification at a higher exchange rate to those observed in
the previous allocation mechanisms would allow PDVSA and the
Central Bank, as the largest foreign exchange suppliers in the economy,
to significantly increase the income from the sale of foreign currency,
thus substantially improving its balance of income and expenses in
bolivars and in general the balance in bolivars of the public sector. Of
course, a higher exchange rate would also imply higher outlays in
bolivars for the external debt, damaging the balance of these
institutions; however, the transitional provisions of chapter IV of the
exchange agreement have ensured that this does not occur because
they establish that for a good set of public sector liabilities the
exchange rate for the sale of 10 VEF/US$ (provided for in article 1 of
exchange agreement No. 35 dated March 9, 2016) would be applicable.
The presence of transitory provisions 23, 24 and 25 means that the
3

The sector could also benefit
by applying a market
exchange rate for the
calculation of its cost
structure. However, the
option is restrictive as long as
it is maintained only for
companies that use the
auction mechanism.
The auction market may
become an effective parallel
market player in the attempt
to reproduce the attributes
and advantages of a free
market.
A market is created for
securities issued in dollars
and payable in bolivars
similar to the SITME, but its
development is uncertain as
long as there is not a volume
of securities to feed it.
The new exchange rate is not
neutral from the inflationary
point of view; instead, it can
generate important price
DIPRO protected exchange rate has not disappeared completely, and
allows us to see a significant improvement in the cash flow in bolivars
of the public sector. This is an aspect that should not be disregarded,
especially in the coming electoral contest as announced by Maduro’s
government.
From the view of the private sector, the unification at an exchange rate
closer to the reality of the market, which can also be applied to the
calculation base of the cost structure of companies that acquire foreign
currency through this exchange system, and also for the determination
of the tax base of tax liabilities derived from customs operations
(Articles 11, 12 and 14), is an advantage that reduces regulatory risks
and the risk of official inspections. It is not so for those business units
which continue to acquire foreign currency in the parallel market.
As we pointed out, the reopening of a market, which at first may look
small for the needs of the economy, is a progress, and will be even more
so, if indeed the economic authorities in charge of the system do not
introduce limits or bands for the free fluctuation of the resulting rate.
In perspective, the market and the process have been designed so that
both natural and legal persons can present their purchase-sale
positions, detailing (in the case of the bidders) only the origin of the
position and the destination of the funds. Likewise, the maximum
amount that can be demanded quarterly is EUR 420 for natural
persons and 30% of the average monthly gross income declared in the
income tax (ISLR) for companies. However, according to the
agreement, the amount per day is determined in the call made in the
last auction.
It is also worth mentioning the power that the agreement grants to
brokerage firms, the brokerage companies and the Bicentennial Public
Stock Exchange to carry out negotiations in national currency, of
securities issued (or to be issued) in foreign currency. The settlement of
balances in foreign currency resulting from these transactions would
be made in accounts in foreign currency in the national financial
system (contained in the Foreign Exchange Agreement No. 20 dated
June 14, 2012) and the latest exchange rate announced in the auction
market. The provision seems to give this market more flexibility and
breadth than the Transaction with Foreign Currency Securities System
(SITME). The great doubt arisen is the volume of the securities
portfolio that could eventually be traded in that market, as well as the
feasibility that new issuances can circulate in a context of financial
sanctions.
Without the slightest doubt, in the complicated context of inflationary
acceleration in Venezuela, the new exchange agreement and regime
cannot be neutral. The elimination of the Dipro exchange rate will
4
adjustments in essential provoke an adjustment process in the prices of many consumer goods
goods. that are today essentially imported by the government, which would
include not only the initial upward pressures, but also the fluctuations
to which the type of auction exchange rate can be subject. On the other
hand, as long as there is not an abundant supply of foreign currency in
any currency market, it is difficult to see disinflation through the
foreign exchange market. The possible convergence that could occur
between the official auction exchange rate and the parallel exchange
rate would have to be much more for a rise in the former than a
decrease in the latter.

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